FFC Recommendations for the Division of Revenue 2011/12

1. FFC Recommendations for the Division of Revenue 2011/12 NCOP Hearings, 17-18 August 2010

2. Overview • Submission made to comply with Section 214 of the Constitution and Section 9 of the Intergovernmental Fiscal Relations Act (Act 97 of 1997), FFC Act and related legislation • Tabled to Parliament in May 2010 • Today’s presentation forms part of consultation processes with NCOP for its further engagement with respective provincial heads and wider stakeholder contribution in provinces on recommendations NCOP, 17-18 August 2010

3. Outline of 2010 Annual Submission • Covers four interrelated areas • The Global Economic Crisis, Fiscal Frameworks and Coping with Vulnerabilities • Options for Social Assistance Reform During a Period of Fiscal Stress • Towards an Effective, Efficient and Transparent Intergovernmental System • The Performance of Conditional Fiscal Transfers in the South African Fiscal Relations System • Local Government Revenue Enhancement Programs and Fiscal Stress • The Review of the Local Government Equitable Share Formula • Regionalising Municipal Services: The Case of EDI • Intergovernmental Fiscal Issues in Urban Public Transport NCOP, 17-18 August 2010 3

4. I. Global Economic Crisis, Fiscal Frameworks and Coping with Vulnerabilities • Issues covered here include: • Understanding better the impacts of the global economic crisis and policy responses on economy, fiscus and poverty profile • How to close the fiscal gap while protecting a still delicate economy • Distribution of pain that is seen to be fair • Implications of modelling alternative scenarios NCOP Hearings, 17-18 August 2010 4

5. Channels of Crisis: • World Economy • International prices • International demand • Foreign Direct Investment • Tourism • Remittances • Channels to households • Consumer and producer prices • Employment • Channels to children • Consumption • Access to child support grant, school etc

6. Impact on government Income/GDP and Savings /GDP for government

7. Impact on real GDP

8. Poverty headcount ratio (P0) under three scenarios

9. Poverty impact in two scenarios Moderate scenario – far less severe impacts on child poverty Severe scenario (crisis deeper, more sustained) – quite strong impact on child poverty, but most at extremely low income levels, i.e. amongst the very poorest children Thus low poverty lines are more appropriate to observe poverty trends

10. Recommendations • In the short term, government should continue to strive for fiscal consolidation through restricting the growth in entitlement spending to those programmes that have demonstrably worked • Government should refocus expenditure to ensure better coordination and deepen access to improved service quality. • In particular the Commission recommends: • Continued expansion of child support grant and old age pension grant • Sustaining the high levels of access to education and health services • Reprioritising expenditure towards repair and maintenance. • In the medium to long term, government should: • Introduce a block grant for education, health and social development that funds clearly defined and costed outcomes in these areas • Enable independent cost effectiveness and quality review of both public and private education, health and social wage

11. II. Social Assistance During a Period of Fiscal Stress • Protect overall social-assistance expenditure during fiscal consolidation, in particular targeted social spending programmes and the main cash-transfer component of poverty-focused public spending (complements anti-poverty interventions) • Do not compromise the relative simplicity of the social assistance system especially when contemplating reform options. • Pilot conditional cash transfer and workfare programmes on a smaller scale, evaluate them in order to expand successful pilots. • Strengthen non-cash complementary social developmental services through emphasising quality improvements within a defined resource envelope. • Avoid universal income grants, as these are currently unaffordable and would need to be accompanied by a broader restructuring of the entitlement system

12. III. (i) Reforming Conditional Fiscal Transfers • When introducing and terminating conditional grants, national departments must: • Introduce a mandatory, systematic process for designing and planning individual conditional grants • Ensure there is an independent evaluation of grant performance at entry, midterm and end of grant • Government should • Make the criteria for dividing grant allocations transparent • Continue to emphasise the importance of non-financial data reporting • National departments must make accounting for delivery a prerequisite for most conditional grants • Budget allocation process must follow grant frameworks specifically

13. III.(ii) Local Government Revenue Enhancement Programs and Fiscal Stress • Revenue challenges originate from (a) local economic, social and demographic circumstances which lead to structural fiscal stress, (b) the design of the intergovernmental fiscal system, and (c) poor service delivery which influences willingness of consumers to pay. • Small rural municipalities mainly face structural fiscal stress, whilst urban municipalities encounter cyclical fiscal stress. • Municipal capacity to generate own revenue being eroded by (a) inability and unwillingness by municipalities to collect revenues (b) inability or unwillingness by residents to pay. • Revenue enhancement programs appear not to be producing the desired results.

14. III.(ii )Recommendations • Government should • Adopt standard early warning systems to detect fiscal stress in municipalities and reach consensus on them • Legislate, through S43 of the LGMS Act of 2000, revenue collection as one of the key performance areas against which to assess overall municipal performance • Support efforts to estimate the fiscal capacity and fiscal effort of municipalities to dispel the perception that certain municipalities will never be financially viable • Subject revenue enhancement programmes to empirical tests that cover changes in (a) effective tax rates (b) tax burdens (c) yield, efficiency and overall fairness

15. III.(iii )Recommendations • Government should • Use the institutional component of Local Equitable Share to assist poor municipalities • Remove the step structure of the differentiated tax mechanism of the Revenue Raising Component and develop a flat gradient structure so that municipalities on the outer ends of bands are not treated unfairly • Develop alternative methods of revenue prediction for the Revenue Raising Component.

16. III.(iv ) Regionalising Municipal Services In its efforts to universalize access to electricity and improve efficiency in the electricity distribution industry, government has, since the mid 1990s, attempted to create six Regional Electricity Distributors (REDs). In 2009, government tabled the Constitution Seventeenth Amendment Bill which allows national government to regionalize municipal functions listed in Part B of Schedules 4 and 5 of the Constitution. FFC submitted its submission on this bill, which opposed this approach, to the Department of Justice in March 2010. The Commission prefers a differentiated approach to reform which recognises cases of good performance so as to identify appropriate incentives and knowledge to regulate the industry.

17. III.(iv ) Recommendations • A blanket regionalisation approach, as proposed in the 17th amendment to the Constitution, is not supported. Current legislative provisions allow for alternative service delivery arrangements that do not dilute municipal authority • Government should • Revisit the Blue Print assumptions initially made to restructure the EDI. Clarify whether it is necessary to change ownership and structure in order to ensure efficiency, economies of scale, robust regulations and to deal with management challenges in the sector • Conduct an up-to-date re-evaluation and analysis of the benefits of restructuring the EDI. • Finalise EDI Restructuring Bill and practical guidelines (Asset Transfer Guide) related to the shifting of municipal/Eskom distribution assets first before moving towards more advanced stages of restructuring • Ensure compatibility of operating systems that will underpin REDs activities • Universal access to electricity should not be lost in EDI restructuring process

18. IV. Intergovernmental Fiscal Issues in Urban Public Transport Significant increase in public transport capital spending in recent years, but lack of clarity over accountabilities between the three spheres of government an obstacle to investment in improved public transport. National Land Transport Act intends shift of management of bus contracts from provincial to metropolitan and city governments, and provides for the establishment of Municipal Land Transport Fund. If public transport responsibilities are shifted to urban municipalities without addressing the concomitant financial implications, municipal finances could be severely affected. Recent experience of running bus rapid transit systems indicates that annual operating subsidies will be required.

19. IV. Recommendations Conduct a review on costs associated with current urban form in selected cities with a view to improve land use patterns efficiencies PRASA and cities should ensure that investment projects on rail and roads infrastructure are aligned and coordinated along A and B corridors of the National Rail Plan. Funding streams to the Municipal Land Transport Fund, and the potential financial implications resulting from the promulgation of the National Land Transport Act on municipalities, should be examined by the Department of Transport and the National Treasury. Department of Transport should regularly update the South African National Household Travel Survey